Corporate residence is determined by the place of incorporation of any given company.
For CIT purposes, companies incorporated under foreign laws that have their main domicile abroad are considered ’foreign companies’, whereas any company incorporated in Colombia under Colombian law qualifies as a ‘national company’ even if fully owned by foreign shareholders.
Rules on effective place of management are in place (see below).
Permanent establishment (PE)
The Colombian internal legislation incorporates the concept of PE. This concept follows the OECD criteria and means a fixed place of business through which an entity carries out its activity, whether partially or totally.
A PE will also be incorporated when a person (other than an independent agent) has the capacity to conclude contracts on behalf of the foreign entity, except for preparatory and auxiliary activities.
In order to define what should be understood as preparatory and auxiliary activities, local regulations have adopted the OECD criteria.
Colombian law upholds the triggering of a PE upon the presence of a fixed place of business that is located in a given place and features a certain degree of permanence (no cut-off timeline is provided) where a non-resident entity conducts part or the whole of its business.
Auxiliary and preparatory activities that do not cause a PE to exist are listed out. The regulations reiterate that a PE is subject to income tax on worldwide income attributable to its course of business as well as on any income directly earned.
Also, a PE will be subject to domestic WHT rates whenever engaged with resident parties.
However, payments or accruals to non-residents having a PE may continue to be subject to rates set out for non-residents if the underlying transaction is unrelated to the PE's purpose. A PE will be required to make annual CIT filings. PEs are given the capacity to withhold and remit taxes as well as to charge and collect VAT to the extent of taxable transactions.
Requisites for registration of a PE are set out and include, inter alia, good standing documentation or proof of existence as well as an active account at a local bank or financial institution.
A PE is required to prepare contemporaneous documentation (in addition to transfer pricing compliance requirements) with a functional and technical analysis of the assets, liabilities, capital, risks income, costs, and expenses attributable to its business in Colombia. In addition, a PE must, for tax purposes, prepare separate accounts for purposes of the attribution of income and capital gains.
Interest on debt push down to branches and PEs under attribution rules is deductible only when subject to WHT.
Branches and PEs are subject to income tax on worldwide source income that is attributable under attribution rules since 2019.
Effective place of management (EPOM)
As of FY 2023, EPOM rules are broadened and will operate around less subjective tests to include scrutiny over the place where day-to-day activities are carried out, as well as the place where management usually exercises authority and responsibility over the entity’s affairs.
Guidance is available (Regulation 3028 of 27 December 2013) on how to register a non-resident entity that is effectively managed in Colombia and treated as a resident for tax purposes.
The process requires submission of a good standing documentation, proof of identity of the legal representative (or attorney if a mandate to register exists), and availability of an active bank account at a resident bank or financial institution.
The rules require entities effectively managed in Colombia to carry local books under International Financial Reporting Standards (IFRS) as well as to satisfy tax compliance requirements upon completion of the tax registration.
Entities with their EPOM in Colombia are required to withhold and remit taxes as well as to charge and collect VAT to the extent of taxable transactions.
No EPOM will be deemed to exist in Colombia for (i) non-resident issuers listed on the Colombian stock exchange, or any other internationally reputed exchange, nor (ii) non-resident entities when 80% or more of its revenue is sourced in the country where the entity is domiciled.
A non-cooperative jurisdiction or place of null or minimum taxation would be established by the government if one of the following criteria is complied with:
- Inexistence of taxation or existence of nominal taxation under the nominal rate used in Colombia.
- Absence of an effective exchange of information or existence rules or administrative practices hindering it.
- Lack of transparency on a legislative, administrative, or regulatory level.
- Inexistence of substantive local presence, development of a real activity, or economic substance.
Aside from these criteria, the Colombian government is enabled to use the accepted international criteria in this matter.
In addition to non-cooperative or place of null or minimum taxation, law established an extra requisite to define preferential tax regimes, which refers to jurisdictions that ring-fence their benefits for their residents and offer them only to non-resident entities or individuals; such preferential tax regimes are to be jurisdictions that met with two of the above-mentioned criteria.
In accordance with the above, the Colombian government will be entitled to adopt a tax haven list; such a list exists currently and can be updated from time to time.
Any payment or accrual, regardless of its nature, that constitutes taxable income for a beneficiary that is deemed as resident, established, located, or functioning in a tax haven jurisdiction is subject to a 35% WHT (general CIT rate for FY 2022).
Transactions with entities that are tax haven residents are subject to the transfer pricing regime. As a result, Colombian taxpayers must file a transfer pricing report and a transfer pricing informative return for such transactions, regardless of whether or not the entity’s equity or gross income is lower than the threshold established by Colombian law for applying such compliance obligations.
In addition, if the transaction occurs with a related party, the resident taxpayer is required to prepare and submit an additional supporting study, proving the details of the functions performed, along with any assets used or risks assumed, and the full costs and expenses incurred by the tax haven resident while rendering the service or in the overall conduct of the activity to which the deduction relates.